How Democratic Is the Euro?

If the European Union is to remain viable and democratic at the same time, policymakers will have to pay closer attention to the demanding requirements of delegating decisions to unelected bodies. They should promote such a delegation of sovereignty only when it truly enhances the long-term performance of their democracies.

SAN SERVOLO, ITALY – When Italy’s president recently vetoed the appointment of the Euroskeptic Paolo Savona as finance minister in the government proposed by the Five Star Movement-League party alliance, did he safeguard or undermine his country’s democracy? Beyond constitutional strictures specific to the Italian context, the question goes to the heart of democratic legitimacy. The difficult issues it raises need to be addressed in a principled and appropriate manner if our liberal democracies are to be restored to their health.

The euro represents a treaty commitment from which there is no clear exit within prevailing rules of the game. President Sergio Mattarella and his defenders point out that an exit from the euro had not been subject to debate in the election campaign that brought the populist coalition to power, and that Savona’s appointment threatened a financial market meltdown and economic chaos. Mattarella’s detractors argue that he overstepped his authority and has allowed financial markets to veto the selection of a minister by a popularly elected government.

By joining the euro, Italy surrendered monetary sovereignty to an external, independent decision-maker, the European Central Bank. It also undertook specific commitments with respect to the conduct of its fiscal policy, though these constraints are not as “hard” as those framing monetary policy. These obligations place real limits on the Italian authorities’ macroeconomic policy choices. In particular, the absence of a domestic currency means Italians cannot choose their own inflation target or devalue their currency vis-à-vis foreign currencies. They also have to keep their fiscal deficits below certain ceilings.

Fine piece. You put much emphasis on the poor outcomes of Eurozone policies as regards the failure to ensure a virtuous meshing of Democratic principles and economic initiatives involving supranational institutions. I believe that this misses the mark as to the ultimate, rather than proximate source of the problems such as, the most important one, growing inequality. The ECB’s toolkit is not geared to overtly aid and abet the rapacious behavior of corporate actors and their exceedingly greedy (greed – as a survival instinct is not necessarily a bad thing in moderation.) shareholders. It is the humans in the equation that are the ultimate source of discord between democratic values and economic policy. Like the humans that wield dumb guns to nefarious purpose, it also this same species, driven by the need to accumulate and dominate (again, as a piece of evolutionary baggage that has outlived its usefulness) that distorts perfectly useful economic tools.

DEMOCRACY V ECONOMICSUnless there is a Nobel Prize for Democracy, Economics will breed Inequalities.Unless Economics is realigned with Democracy, Inequalities will not go away.The Marginalized Majority will win every confrontation.In America. In Britain. In Greece. In France. In Italy. In India. Japan has no such destabilizing confrontation - The Tokkaido Corridor.Canada has no such destabilizing confrontation - The Windsor/Quebec Corridor.Within each Democracy, Realignment of Economics with Democracy is the need.The predicament is Europe - Democracy resides with Sovereignty.The German Chancellor is elected by German Sovereign Democracy.The French President is elected by French Sovereign Democracy.Not by Europe. Brussels at best is United Nations @ Europe.Not Headquarters of The EUSSR.

Unfortunately the European Union and the euro are by design anti-democratic. This is not completely intentional, but is based on the idea that there can never be a step backwards in integration. It means once an EU institution oversteps its democratic mandate it can never be fixed. This is the problem with Greece: it cannot live with the requirements for the euro, and has no alternative to leave. This is a function of both institutional design and mindset. Greece's situation is due to institutional design, where the Lisbon Treaty was due to mindset. The Lisbon Treaty failed to pass the required referendum in several countries. The EU officials had imagined a greater unity and could not imagine reversing that thinking, so they simply changed the title of the document, pretended they had democratic support and implemented it. All of the changes based on the Lisbon Treaty do not have democratic legitimacy, but at this point there is no way to fix any of it. (Yes there is a story about changes between the rejection of the EU Constitution and the implementation of the Lisbon treaty, but it is semantics without meaning - the transfer of sovereignty represented by establishing the ECJ required a referendum regardless of the vocabulary used.)

After WW1 the British government pursued a deflationary policy with massive austerity in order to pay down war debts to the USA and restore Britain's place in the world. The main vehicle of this was the Gold Standard. However the 1928 Representation of the People Act introduced universal adult suffrage and then ... a miracle occurred. No longer could the Administration pursue "sound" financial policies at the expense of the working class because they had a vote. In a couple of years the Gold Standard was junked.

Now in Greece and Italy we have a similar situation. Policy is made for Germany and the wealthy North of the EU and the Italians and Greeks are prescribed "austerity" told to engage in "structural reform". They can, so far, do nothing about it. As W. Schauble notoriously said "votes change nothing".

When policy creates winners and losers it is political and if not under democratic control then democracy is imperfect. The argument is put forward by Mervyn King in "The End of Alchemy". I must read Tucker's book.

The ECB and the Fed actually did exactly what democratic governments asked them to do. They controlled goods and service prices and supported growth. Unfortunately, they did so through means whose most pronounced effects were felt in asset prices, increasing inequality, corrupting capital markets and threatening financial stability. These central banks are now beginning to look at accounts for individual citizens that would allow them to bypass asset markets while providing support to income and demand when needed. That is the critical reform. Central banks need channels for monetary policy that are minimally distorting. Otherwise, they will simply push economies from one problem to the next.

Asset prices and monetary policy is something that is far from being clear, and its the subject of much disinformation and demagogy.

I actually question such conclusion, because oft the lack of empiric evidence (Asset prices increased in a period of stable monetary policies, not when QE was in place) and mostly because of the lack of a direct mechanism of transmission between monetary policy and asset (stock) prices.

Truth is that, IMHO, central banks were being truthful to their mandates, and hence democratic, when they were accommodating the ever decreasing money velocity by increasing money supply. The proof is that no inflation was produced.

Some Central Banks stopped being democratic once they started catering to the Hawks and started monetary tightening without any economic nor monetary foundation, just because the voices were loud....

There is always this question of the legitimacy of the central bank, but the pragmatic analysis must recognize that the results of the ECB are excellent: deflation destroyed, fast-growing economy (for Europe), financial repression of pensioners in favor young people.

Thank you, this is an important question. With low rates, winners and losers are not the same: young people, entrepreneurs and those who will be able to borrow. Retirees, savers (In Europe, many invest in security with state bonds) are losers. It changes everything, young people and entrepreneurs are more dynamic and have a more modern and technical vision, it is much better for the economy.Another example: many consumers expect cleaner cars, it's going to be the rush on plug-in hybrids, with low rates, fleet renewal will be faster, it's good for businesses, for the planet and growth future self-maintenance more easily.

Sovereignty is the one thing that can never be delegated, any attempts in this regard would strike in the heart of any democratic system. Concerning Italy, JCJ recently said that the EU Institutions respect the sovereignty and the rights of the EU member states, the same though cannot be said of the EU Institutions and how they perceive the EU member states. Regarding the ECB, and if compared to other similar institutions, say the IMF, the ECB has been doing extremely fine.

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